FX Update: Fed terminal rate hits new highs. China recovery story misstep. FX Update: Fed terminal rate hits new highs. China recovery story misstep. FX Update: Fed terminal rate hits new highs. China recovery story misstep.

FX Update: Fed terminal rate hits new highs. China recovery story misstep.

John Hardy

Head of FX Strategy

Summary:  The terminal Fed funds rate reached a new cycle high above 5.25% yesterday in the wake of stronger than expected CPI data and fresh Fed jawboning, with the USD chopping all over the place before finding new strength overnight, possibly on concerns that the Chinese recovery story has been over-played. This morning, sterling hit an air pocket on soft CPI data that will likely give the Bank of England the green flag to soft-pedal further rate increases.

Today's Saxo Market Call podcast
Today's Market Quick Take from the Saxo Strategy Team

FX Trading focus: Fed expectations at cycle high, soft UK CPI data points spoils GBP comeback attempt.

The US January CPI print saw headline and core inflation running hotter than expected for the year-on-year measures, while the month-on-month data was in-line with expectations at 0.5% at the headline and +0.4% for the core. Doubters pointed to the “core services ex shelter” measure (the one the Fed has highlighted as driving the most concern on its part) only registering a +0.3% rise month-on-month (though that in turn was pulled down by a steep -0.7% decline in the very choppy Medical Services data series). All in all, after a very choppy reception to the data, the market decided it wasn’t that much the wiser and the greenback was relatively unchanged late yesterday, outside of USDJPY pulling above resistance and 133.00. Some late jawboning by various Fed officials helped as well as the CPI data to take the terminal Fed rate to a cycle high of 5.26%, but with a muted advance in the longer end of the US yield curve, the inversion of the US yield curve reached a new record low for the cycle of -87 bps for the 2-10 part of the curve.

An entirely different driver materialized in the Asian session to drive the US dollar higher, which was negative action in a confluence if indicators that are all proxies for the China reopening story (copper, AUD, Hong Kong equities). Not entirely sure of the cause-and-effect of this development, but a Bloomberg article out overnight does reveal that at least some of the credit impulse that Chinese officialdom is mobilizing to boost consumption is instead finding its way into paying off higher-yielding mortgages or is even being uses to speculate in equities. The sense, if this story is broadly true and the behaviour widespread, is that the Chinese recovery story will need to prove itself from here.

Today’s soft UK CPI release more than erased the impact of yesterday’s firm labour market data, as the negative 0.4% miss on core CPI YoY at 5.8% YoY (vs. 6.2% expected and 6.3% in December) will more likely keep the Bank of England happy with its complacent inflation forecast and rate guidance (seeking to avoid further tightening as long as inflation continues to drop). UK 2-year yields are coming in 15 basis points lower today after this data release while the US 2-year yield closed at a local high yesterday on the US’ own CPI data yesterday. This has engineered a steep sell-off after the zany pump in GBPUSD yesterday that conveniently touched the very technical 61.8% retracement level of the prior sell-off near 1.2270 before the subsequent 200 pip plunge. Next levels of interest to the downside include the pivot low near of 1.1961 and the 200-day moving average coming in slightly below, but the most important level is the 1.1842 pivot low. Elsewhere, the BBC is out with a story suggesting a Boris Johnson political comeback attempt, in a bid to “save” the Conservative party after its polling hit record lows last year.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
Still weak trending indicators for most of G10 as the recent action in many cases is moving against the prior direction (GBP selling off after sharp rally, for example). Most noteworthy in relative strength terms is the weakness in the precious metals as higher yields are biting there, together with a softening in the copper price, which has correlated very closely with the CNH direction for months on the post-Zero Covid recovery narrative. AUD certainly jolted overnight, but it has been trending higher in many places in prior days.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
The EURSEK and USDSEK backups are a real disappointment for those looking for an extension in SEK strength, watering down the potential for something interesting unfolding there. Note EURGBP so far trying to reject the attempt to establish a new downtrend with today’s action, while GBPUSD affirmed the still young downtrend yesterday after the squeeze higher.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights

  • 1330 – US Feb. Empire Manufacturing
  • 1330 – US Jan. Retail Sales
  • 1330 – Canada Dec. Manufacturing Sales
  • 1400 – ECB President Lagarde to speak
  • 1415 – US Jan. Industrial Production & Capacity Utilization
  • 1500 – US Feb. NAHB Housing Market Index
  • 0030 – Australia Jan. Employment Change / Unemployment Rate

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000

Contact Saxo

Select region


The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.